Capitol Hill Area Submarkets Q4 2018

Capitol Hill Area Submarket Cluster

Capitol Hill Submarket Overview

The Capitol Hill Submarket has consistently maintained vacancies lower than the metro’s, due in no small part to its proximity to the seat of American power. Much of the employment (about 55%, according to the census) is categorized as “public administration”— or government work. Office space here rents at a premium to nearby submarkets like NoMa and Capitol Riverfront, due largely to supply limits in the Judiciary Square area, where asking rents regularly exceed $55/SF. In fact, rents in Capitol Hill are the second-highest in the metro, behind only those in the East End. Sales have been strong for the past few years, and though volume has decreased each year since 2015, it still hit $196 million last year. This year may be end up being the weakest since then, though; just under $50 million was recorded through the first three quarters of the year.

Southwest Submarket Overview

The federal government is a staple tenant in the Southwest Submarket, limiting redevelopment opportunities close to the National Mall. But building near the waterfront surged as the Navy Yard and Nationals Park construction sparked revitalization of underused land and catalyzed office development. The revitalization has spread to Southwest, too, with the completion of phase one of the Wharf and Audi Field, home to the MLS team D.C. United. Demand has already shown signs of life, as well. Absorption was lackluster from 2013–16, causing an increase in vacancy and hurting rents, but 2017 was a solid year, following the uptick in metro-wide absorption. And the momentum continued into 2018, with USAID taking down the biggest block of available space in the submarket, but the impact of that move will be muted because it is consolidating between buildings within the submarket.

Consolidation isn’t the only thing weighing on office demand here—the U.S. Department of Agriculture recently announced that it will relocate two of its agencies, both of which are in Southwest, outside of the Washington, D.C., metro. Only four investment-grade properties traded from 2013–16, but sales picked up last year, with seven transactions generating $775 million in volume. As of mid-October, only one sale had recorded for 2018, putting volume at $118 million.

NoMa Submarket Overview

New development has increased NoMa’s office stock by about 33% over the course of this cycle, and that development, along with an influx of apartment supply, makes this one of the most rapidly changing submarkets in the metro. Demand has generally kept up, and while vacancy increased in the middle years of this cycle, strong absorption helped it compress in 2017 and 2018, keeping vacancy below the metro average. GSA tenants have been the major driver of office demand here, and the Peace Corps’ announcement that it is relocating its headquarters to NoMa was just the latest example.

The plethora of green 4 & 5 Star buildings here with rents cheaper than those in core office submarkets helps NoMa attract and retain federal tenants. The Department of Justice moved into 345,000 SF at Three Constitution Square earlier this year and will occupy nearly 500,000 SF in Four Constitution Square when it delivers next year. Other GSA tenants in NoMa include the Federal Energy Regulatory Commission, the Department of Education, the Securities and Exchange Commission, the Internal Revenue Service, and Customs and Border Protection. The D.C. government also uses space in NoMa for the D.C. Housing Authority headquarters.

Capitol Riverfront Submarket Overview

GSA consolidation and Base Realignment and Consolidation (BRAC) fallout pushed vacancies above 20% in the middle years of the cycle. In fact, with over 40% of its office space occupied by GSA and contractor tenants, Capitol Riverfront ranks in the top-five submarkets in the metro for federal office exposure. Besides the U.S. Department of Transportation and Naval Sea Systems Command, other major office tenants include the District Department of Transportation, Lockheed Martin, Computer Science Corporation and Parsons Corporation.

In the largest lease signed in the past five years, the National Labor Relations Board moved into 151,000 SF at 1015 Half St. SE, relocating from D.C.’s East End in 2015. More recently, the National Association of Broadcasters (NAB) signed a 130,000 SF lease at Monument Realty’s 1 M St. SE. NAB plans to relocate its 150-person headquarters here from DuPont Circle when the project delivers next year. These leases have absorption on the mend, and vacancy is beginning to recover, even if it remains elevated. Still, investors haven’t been active here, and volume has been negligible since 2014.

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